John’s Mining Journal: Xtract Resources and Solgold

Veteran mining analyst John Cornford reviews some of the more interesting plays in the junior mining sector…

With rosy prospects for copper, and its just-announced fund-raising, it’s time to continue with Xtract Resources (LON:XTR). Some on the bulletin boards think I am an expert on the exploration of its ‘Racecourse’ porphyry project in New South Wales for which it has just raised £5.5m to fund a second-stage, much expanded, drilling programme.

But I’m not such an expert. It looked an obvious opportunity when I first mentioned it, but now it is becoming far more complicated, albeit still a promising one but which might take some time to deliver. With the initial drill results, helped by an aerial magnetic geophysical survey programme already started, helping to plan the second-stage drilling programme, the information to allow more reliable estimates of the resource deposit, its shape and size, won’t start to come through before six months from now. And as I’m not a geologist, I can’t comment on whether it will turn out to be the ‘pear shaped’, more complex with ‘fingers’, ‘possibly multiple’, and ‘more extensive at depth’ deposit that CEO Colin Bird seems to be hinting at. He has, however, in connection with the placing, mentioned officially for the first time that his ‘target’ is the 2 million tonnes of contained copper that would trigger Anglo American’s option to buy it.

But even when assay results are published (hopefully soon for the first four drill holes) ) I will be as much in the dark as to Racecourse’s likely value as anyone else. That can only be guessed at once the mining engineers and planning consultants get to work on the extensive drilling information that will be needed. For that reason I’ll leave any estimates to the experts from now on.

So I also caution that any ‘guess’ as to what Anglo American might pay to take up its option to buy 80% of the wider Bushranger project, of which Racecourse is a part, is still hazardous. My initial guess for 3% of the in-ground value – ie some US$500 million – always did depend on a wide range of factors that it is impossible to fully list here. All one can say is that during the last mining bull market ten years ago, some of the best prices for near surface ‘in-ground’ gold deposits were in that ball park. 

Currently, however, deals in the market for copper resources on which to base such an estimate are few and far between, while listed market values for copper explorers vary enormously. There are usually very good reasons for disparities, not least the fact that there is no ‘efficient’ market for mining shares, which guarantees they are valued fairly.

One listed company with a deposit which looks of similar size to the 2 million tonnes that Racecourse is aiming for is ASX listed Caravel Minerals’ with its Bindi copper porphyry in Western Australia. Bindi already has a scoping study and ‘if developed’ is likely to be a low cost open pit costing $A480m but generating (according to one local mining commentator) a $A2bn NPV. If it can be funded, that same commentator thinks its shares could be worth the same as its capex, ie A$480m or £260m. But its value on the ASX currently is only $A72m (ie only £40m compared with Xtract’s £46m just before the latest placing) – and that is with a scoping study already under its belt.

That shows how stockmarket values for mining shares can be wildly out of kilter with one another, and is why during all phases of a mine’s history from exploration to production, it’s a case for investors of ‘waiting, and seeing what happens’. Often, a ‘fair value’ for a mining deposit is not achieved in the stock market until a solid bid comes along. That was the case for Mariana Resources’ high grade Hot Maden deposit in Turkey where, in April 2017, as I then wrote, Mariana attracted an offer  from Sandstone Gold which initially pushed its shares up by 50% – but still far below what investors thought it was worth.

Even so, if I personally were not prepared to take the risk and hope for a reward that is mining investment, I’d be writing about Tesco.

Meanwhile, gold stays subdued, although Solgold (LON:SOLG) (whose current flagship Cascabel is actually 90% copper, while others might be gold) has staged a healthy recovery from the 21p-24p levels to which it sank after Nick Mather stepped down from running its (so far failed) strategy. While it is often possible to spot when a share is going nowhere for a time, it is far more difficult to judge how far it is going to sink. And Solgold sank too far. Now that its new top management has accepted the need to invite others in to help fund drilling on its remaining prospects, its future is a little clearer. If my funds weren’t fully engaged elsewhere, I’d buy back in anticipation of a slow recovery over the next few months.

On another topic that interests me – ie ‘research’ that is economical with the truth –  nothing could be more economical, surely, than the SPACs (Special Purpose Acquisition Companies) coming to the market as IPOs and telling their new investors nothing more than that “they intend to carry on an undertaking of great advantage, but nobody is to know what it is.” (to misquote a South Sea Bubble ‘prospectus’)

We have seen a few of these recently on AIM and on the ‘standard’ (ie laxly regulated) part of the LSE, raising cash from investors which they ‘plan’ to invest in the so-called ‘green energy’ sector. For some, ‘green energy’ is being stretched to cover anything remotely connected with generating power, even though it may not be exactly ‘green’. 

As a commentator has said about the US Nasdaq market, which has seen many such offerings, “a lot of the time, markets will not scrutinize the details of the underlying holding, so long as the price rises” and (a handy tip !) “when the momentum on a SPAC turns negative, investors should sell the stock before everyone else does.”

One of the first sectors I wrote about in Master Investor was ‘coal-to-power’, because tiny companies like Kibo and Ncondezi, and others similar like Oracle Power were ‘sponsoring’ projects many times their own value. The attraction was that, surely, some of that value disparity would rub off on them. But, like the SPACs, most of them have turned out to be very economical with the truth about their business models and the funds needed, and the resulting remote connection between whatever revenues their projects will generate and how much will end up with shareholders. The only one to have been almost fully transparent is Ncondezi Power (LON:NCCL), and although delays have caused a weak share performance, it is still the only one I would touch.